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It's normal for credit scores to fluctuate somewhat, but a major score drop can be cause for concern. If you can't associate a steep score drop with actions you've taken in the past few months, it's possible criminals have taken out credit in your name, and their activity is causing problems with your credit score.
What Causes Credit Scores to Drop?
To know whether you should be concerned about a decrease in your credit score, it's important to understand the kinds of behaviors that can cause credit scores to drop. How much your credit score can drop varies depending on how severely the event or action affects your credit risk.
- Missing a scheduled debt payment can cause a deep, longer-lasting score drop. That's because payment history is the most important factor in your credit scores.
- Making large purchases on your credit cards can result in a credit score hit. Increasing your credit utilization—or the percentage of available credit you're using—beyond about 30% can significantly lower your credit scores. Scores typically recover after you reduce your balances—and can improve if you get your utilization percentage into single digits.
- Severe negative events, including foreclosure and bankruptcy, can negatively affect your credit scores for many years.
- Applying for new credit can cause a small drop in score that typically rebounds quickly as long as you keep up with your bills.
The exact number of points by which these events will lower your score depends in part on the score you had before these events. A missed payment, for example, will tend to deduct more points for someone with an exceptional credit score than it would for someone with a fair score.
When You Should Worry About a Credit Score Drop
To understand whether you should be worried about a decline in credit score, it's important to pay attention to your credit scores and reports so you'll notice if they drop significantly. You can get your credit reports from all three national consumer credit bureaus (Experian, TransUnion and Equifax) for free through AnnualCreditReport.com. You can also get free credit monitoring from Experian to see your FICO® Score☉ at any time.
Whenever you receive a credit score from Experian, you'll also receive an explanation of the reasons, or risk factors, that led to that score. If that explanation doesn't track with your recent credit activity, check your credit reports and look for signs of unauthorized activity or inaccurate entries.
A large drop in credit score that you can't explain could be a sign of fraudulent activity. A criminal may have used your personal information to take out a loan or rack up purchases on a new credit card account, and then disappeared without making required payments.
If you're a victim of credit fraud, it's possible, with time and patience, to clean up your credit history. In the meantime, however, a major drop in credit score could cause your credit score range to slip, from very good to good, or from good to fair, for example. That, in turn, could affect your ability to qualify for loans and other types of credit, or could cause lenders to charge you higher interest rates than you deserve based on your actual credit behavior.
If you experience credit fraud, take action right away by filing an identity theft report and placing a fraud alert or credit freeze on your credit report. With Experian, you can get your FICO® Score through our free credit report.
When You Shouldn't Worry About a Credit Score Drop
There's no need to worry about a small drop in credit score, since scores regularly increase and decrease slightly from month to month, reflecting changes in your loan and credit card balances and other normal credit activity.
Score drops related to new credit applications are not cause for alarm either, as long as you understand what they're related to. (A credit application you did not make can be a sign of fraudulent activity.) When you apply for a loan or credit card, the lender will typically check your credit and what's known as a hard inquiry will show up on your credit report. The inquiry can dock your score by a few points, but its effect typically only lasts a few months.
Even if your score drops more than slightly, you needn't worry if you understand why it happened and can correct it—if an emergency expense drove up your credit card balance significantly, for instance. In that case, paying down your card balance can bring scores back up.
If your score dropped significantly due to a missed loan or credit card payment, however, you won't be able to quickly correct the problem. Late payments remain on your credit report for seven years, though their impact diminishes over time. Read on for ways to improve your credit score when you've experienced a score decrease.
How to Improve Your Credit Score
If your credit scores have dropped because of your credit activity, you can always take steps to improve them, including:
- Reduce balances on your credit card accounts. The lower your credit utilization, the better. Individuals with the best credit scores tend to keep their credit utilization below 10%. If possible, try to pay off credit card balances in full each month.
- Get current on any past-due accounts. If you have any accounts that are past due, such as collection accounts or charge-off accounts, bringing them current is essential to rebuilding your credit scores.
- Apply for credit only when you need it. Although inquiries have minimal impact on credit scores, multiple credit applications for different types of credit within a short time can do cumulative harm to your credit and may cause lenders to view you as a riskier borrower.
- Sign up for Experian Boost®ø. When you share your history of paying utility, cellphone and streaming-service bills, Experian Boost gives you credit for on-time payments that can increase FICO® Scores based on your Experian credit reports. After you sign up, you will receive an updated credit score so you can see how your score was affected. Experian Boost users see an average score increase of 13 points.
Drops in credit score can be unnerving, and you're right to pay attention to significant score drops in case they indicate unauthorized credit activity. But score drops you can trace to your normal credit behavior aren't cause for undue alarm.